The Riskiness of Credit Origins and Downside Risks to Economic Activity

By Claudio Raddatz, Dulani Seneviratne, Jerome Vandenbussche, Peichu Xie, Yizhi Xu

March 29, 2024

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Format: Chicago

Claudio Raddatz, Dulani Seneviratne, Jerome Vandenbussche, Peichu Xie, and Yizhi Xu. The Riskiness of Credit Origins and Downside Risks to Economic Activity, (USA: International Monetary Fund, 2024) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We construct a country-level indicator capturing the extent to which aggregate bank credit growth originates from banks with a relatively riskier profile, which we label the Riskiness of Credit Origins (RCO). Using bank-level data from 42 countries over more than two decades, we document that RCO variations over time are a feature of the credit cycle. RCO also robustly predicts downside risks to GDP growth even after controlling for aggregate bank credit growth and financial conditions, among other determinants. RCO’s explanatory power comes from its relationship with asset quality, investor and banking sector sentiment, as well as future banking sector resilience. Our findings underscore the importance of bank heterogeneity for theories of the credit cycle and financial stability policy.

Subject: Bank credit, Credit, Credit aggregates, Credit booms, Financial institutions, Loans, Money

Keywords: Bank credit, Bank credit growth, Bank riskiness, Bank soundness, Credit, Credit aggregates, Credit booms, Credit cycle, Credit growth, Credit origin, Credit risk, Explanatory power, Financial stability, Financial vulnerability, Global, IMF working paper No. 24/72, Investor sentiment, Loans, Private sector debt, RCO variation, Riskiness Of Credit Origins measurement, Yizhi xu

Publication Details

Pages:

53
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2024/072
Stock No:

WPIEA2024072
ISBN:

9798400270765
ISSN:

1018-5941

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